What is the optimal amount to contribute to a 401 (k) plan?

There are many types of severance pay accounts, but the 401 (k) may be the most convenient. 

Employer-sponsored401 (k) planautomatically donates from each salary to your account and is scrutinized by experts Invest in your money and, in most cases, postpone your income tax on your income until the second half of your life. 

Many employers make a contribution consistent with a 401 (k) as employee benefits, as long as they put in their own cash. But how much should you put in, and what can you do to get the most out of your 401 (k) in the long run? Here's what you need to know:

How much can you contribute to a 401 (k)?

The Internal Revenue Servicehas set an annual contribution limit of 401 (k). This limit depends on age, but in 2022 most Americans can donate up to $ 20,500 throughout the year. For people over the age of 50, the limit is up to $ 27,000 (which allows workers nearing retirement to catch up).

However, this is a limitation of personal contribution. If your employer also contributes to your account, you can technically exceed these amounts (up to 100% of yourreward or $ 61,000, whichever is lower). Some employers offer matching donations. That is, for every dollar you donate to your account, donate an amount that matches a certain threshold. 

According to thereportfrom the investment management group Vanguard, most profit-matched employers pay 50 cents to $ 1 for up to 6% of their employees' salaries. Donate So if you earn $ 50,000 and donate at least $ 3,000 (50,000 x .06) yourself, your employer will donate up to $ 1,500 a year. 

How much should you contribute?

Ideally, you should use the IRS maximum donation limit to your account each year. But if that is not economically feasible, start by making sufficient contributions to maximize the employer's contribution. If you don't know what it is, check with your company's benefits manager. They can guide you through the matching contribution policy and give you instructions on how to set up your contribution.  

"Please contribute the maximum amount your household allows, up to the maximum annual contribution allowed by the IRS," said DanielMilan, managing partner of Cornerstone Financial Services. I am saying. "At least if your company offers a match, you need to donate at least the percentage you need to win the biggest match, otherwise it's the free money you have left at the table."

However, please be careful. Remember to check in with your plan manager each year as your company may change its matching policy from time to time. You will want to make the most of your employer's contributions wherever possible economically.

401 (k) Alternative

Get the most out of your (and your employer's) 401 (k) contributions and still have disposable funds If you still have, we recommend that you consider donating to another account in addition to your 401 (k).

Some options are:

• IRA: Both traditional andRoth IRAare smart options. These allow you to donate up to $ 6,000a year (or more if you're 50 or older) and build wealth for retirement. The difference between the two lies in the tax treatment. Traditional IRAs pay taxes on withdrawals, but Roth IRA contributions are after-tax. That is, you first pay taxes on your income and then make contributions. This allows you to avoid taxes when you withdraw funds later. 

• Health Savings Account:HSAallows you to secure pre-tax money for your medical expenses. This includes medicines, emergency supplies, health insurance deductions, and other health-related costs you may incur (for example, the Covid test). 

• Life Insurance: If you have a spouse or dependents, it may be economically wise to invest additional money in your life insurance policy. Talk to your insurance agent if you choose this strategy. There are several types of policies to consider. 

• 529 Plan:529 Planallows you to save money for your child's future college expenses. In one plan, when a child reaches a certain age, the money can even be used for vocational school and other expenses. (However, this will vary from state to state, so check with your local financial expert). 

You can also talk to your financial adviser. A financial adviser can help you determine the best strategy for your budget and retirement goals. They can provide personalized investment, savings and budget guidance for your particular situation.